The North Korean Nuclear Payola

Economists can tell you -- and on this one they are usually right -- that when you raise the rewards for a specific form of behavior, you tend to get more of it. Suppliers will increase production, and potential suppliers will enter the market, all trying to profit by satisfying the increased demand. For example, when the U.S. government provided a de facto taxpayer guarantee for risky home loans, there was a boom in this kind of lending -- and so we got the subprime mortgage crisis.

To take a simpler example of incentives at work: If a schoolchild kicks his classmates, and the teacher responds with a gentle chiding accompanied by a piece of candy in diplomacy, (in the world of soft-power diplomacy, this is called carrot-and-stick) do not be surprised if the rest of his classmates try kicking each other. After all, whatever the teacher's intentions, the message is: kick someone, and at relatively low cost, you will get a piece of candy.

So it is with incentives in foreign policy. When the U.S. government offers North Korea rewards for scrapping its nuclear arms projects, U.S. diplomats -- whether they mean to or not -- are creating incentives for other rogue regimes to pursue nuclear programs, if only with the aim of then using them to leverage rewards from the U.S. and friends. Once this becomes the established pattern, there are incentives for lots of folks to try it.

Another word for this routine is nuclear extortion -- and the higher the pay-offs America is willing to provide, the greater the incentives for rogue regimes to give it a whirl. Libya is a marvelous example of a regime that in exchange for surrendering a nuclear kit that it shouldn't have had in the first place has been handed privileges -- out from under sanctions, off the terror list, and seated on the UN Security Council -- that Tripoli might otherwise never have obtained... at least not without reforms on which Gadhafi has not remotely embarked.

In theory, these pay-offs for denuclearization are coupled with penalties -- not just carrots, but sticks, which on balance are supposed to reduce or negate the rewards meant to chivvy rogue regimes away from bad behavior. In Libya's case, the potential penalty shoved in Gadhafi's face in 2003 was the fate of Saddam Hussein -- and that, at the time, was quite a stick.

But in recent years, the penalties have largely dried up. Since defying the UN to invade Iraq in 2003, the U.S. and allies have resumed trying to channel penalties through the UN, where the mix of an opaque and self-interested bureaucracy, and the conflicting interests of member states tend to water down measures such as sanctions into a big puddle of mush (remember Oil-for-Food, or note the more recent failures of three resolutions meant to stop Iran's uranium enrichment extravaganza).

In the case of North Korea, carefully targeted U.S. Treasury sanctions were actually inflicting some pain a few years ago, but were then sidelined and effectively watered down by the State Department, as chief negotiator Chris Hill chose to brandish before Pyongyang as the main instrument of U.S. soft power a gigantic carrot.

In return for paying out big rewards to the Pyongyang regime -- cash, diplomatic concessions, fuel, food -- the U.S. has gotten not much more in return than a big pile of paper (that would be the uranium-contaminated documentation of activity at the Yongbyon reactor, which North Korea is now threatening to fire back up). So, in the marketplace of foreign policy, as other unsavory governments weigh the costs and benefits of pursuing illicit nuclear weapons programs, the State Department has effectively abetted North Korea in sending the message that there are big payolas waiting for any rogue regime willing to get into the nuclear extortion business. (Hello, Iran). In effect, the U.S. State Department has upped the demand for such stuff. More on that in my column this week for Forbes online: "A Clear and Present Nuclear Danger."